Employee Costs | CMA Inter Syllabus
Labour cost occupies a significant portion of the total cost of a product manufactured or services rendered. Allowing labour cost to go out reasonable limits may lead an organisation to serious difficulties. Thus, labour cost control which is the focus area of labour cost management is referred as one of the most significant aspects of cost accounting. Labour cost management is a complex process because it represents a sensitive area involving human behavior. Labour cost proportion of product cost or service cost may be, sometimes, key consideration for pricing decisions and profitability analysis. Thus, economic utilization of labour is a dire need of any industry. Management is interested in the accumulation and analysis of labour cost
because they serve as a basis for:
Conclusively, it may be said that labour is the physical and/or mental effort expended to manufacture products. And labour cost is the price paid for using human resources. labour cost management is the mainly focussed on the control aspect of the cost of labour such that the cost of production remains within control limits.
Paragraph 4.7 of CAS 7 defines employee cost as benefits paid or payable for the services rendered by employees (including temporary, part time and contract employees) of an entity.
Employee cost includes payment made in cash or kind.
For example, Employee cost includes the following:
Salaries, wages, allowances and bonus / incentives, Contribution to provident and other funds, Employee welfare, and other benefits
The following steps will be useful in controlling and reducing the labour cost:
Paragraph 4.5 of CAS 7 defines direct employee cost as costs, which can be attributed to a Cost object in an economically feasible way.
Indirect labour, on the other, includes all other labour costs related to production (e.g., salary of plant supervisor).
Like indirect materials, this is considered a factory overhead cost.
Paragraph 4.10 of CAS 7 defines indirect employee cost as employee cost, which cannot be directly attributed to a particular cost object.
Labour cost management, as such, is an arena where specifically three departments have to put in their efforts. The whole gamut of labour cost management is pictorially represented in the following diagram:
Various aspects of Labour Cost Control
In the modern competitive environment, it is essential to make efforts for controlling and reducing the labour cost. Systematic efforts are required in order to achieve this target. The following steps will be useful in controlling and reducing the labour cost:
Principles of measurement of Employee Costs (CAS – 7)
The guidelines for ascertaining the labour cost / employee cost are as follows:
Control of Labour Cost
Labour cost consists of the total amount of wages paid to the workers and other expenses related thereto. It includes hourly or piece rates payable to the workers. It may be excessive due to inefficiency of labour force, high idle time and overtime payments, increase in spoilage, waste and defective production due to lack of supervision and inspection, high labour turnover and other matters. Therefore, it is clearly seen that the control of labour cost is essential in every organisation to cut down the cost of production and to improve the labour productivity / efficiency. The following departments play a vital role in labour cost control:
Important factors for the control of Employee Cost
The factors which need consideration for the purpose of controlling employee cost effectively are as follows:
Collection of Employee Cost
It is the responsibility of the cost accounting department to ascertain the effective wages per hour in each department and analyse the total payment of wages of each department into:
In this process the costs of various jobs are ascertained and the proper recording of time spent by the employees can be ensured.
Like Personnel Department, this department also plays an important role in labour cost control through maintaining record of each worker’s time-in and time-out during regular working period and reporting the time of each worker for each department, operation or production order. Thus, this department is responsible for recording the attendance time of each worker accurately. This will ensure punctuality and discipline in the company and will have a positive impact on the morale of each worker. time keeping is a statutory requirement also and therefore accurate recording of time should be ensured. The important role of time keeping from the point of view of labour costing and control can be summarised as given below:
Methods of Time Keeping
The methods of time keeping are as follows:
Essentials of a Good Time Keeping System
A good time keeping system is supposed to have the following requirements:
Time Booking
In time keeping we have seen that the basic objective of time keeping is to mark the attendance time, i.e., time in and time-out. Time keeping aims at keeping a check on the number of hours spent by a worker in the factory. However, it does not record the productive time of the workers. It means the time keeping methods do not provide information about how the time is spent by the workers in the factory. For example, the time keeping record will show that the worker has reported for duty at 8 am and left at 6 pm, thus, he has spent 10 hours in the company. But the analysis of these 10 hours is not provided by the time keeping. In view of this there is a need to have a system, which will tell about the productive time spent by the workers in the factory. The method, which supplies this information, is known as ‘Time Booking Methods’ and the recording the time spent by a worker in each job, process or operation is known as ‘Time Booking’.
The objective of time booking are as follows:
Time Booking Methods
The following methods are used for time booking:
Thus, time keeping is simply maintaining attendance of the workers i.e., the time of arrival and the time of departure and thereby the time spent by the worker in the organisation is measured, whereas time booking is not only maintaining the time spent by the workers in the organisation, but also the time spent on each and every job including the idle time with reasons are recorded.
Work Study
In order to motivate workers, it is necessary to design a proper incentive system of payment of wages. Money is the strongest motivating factor and hence monetary incentive system become essential. In any incentive system, the bonus is paid by comparing the standard performance / production with the actual performance i.e., actual production. Bonus is paid if the actual performance is higher than the standard one. However, for deciding the standard performance, standard time, i.e., time that is allowed doing a particular job should be fixed against which the actual time taken should be compared. The work study which includes, the job study, and the method study ensures the fixation of standard time to do a particular job and thus has become extremely important in the designing of the incentive system. Work study components are discussed below.
Method Study
Method study is done to improve the methods of production and to achieve the most efficient use of the resource like, manpower, machines and materials. Method study has the following stages:
Work Measurement
The work measurement aims at determining the effective time required to perform a job. The ineffective, wasteful or avoidable time is separated from required time to complete the work. The effective time so established in work measurement can be used for the following purposes:
The following stages are involved in work measurement:
Job Evaluation
It is necessary for the management of any organisation to establish proper wage and salary structure for various jobs. For doing this in a scientific manner, it is necessary to determine the relative value of jobs and hence a job evaluation is done. Job evaluation is a technique of analysis and assessment of jobs to determine their relative value within the firm. It aims at providing a rational and equitable basis for differential salaries and wages for different classes of workers. Job evaluation has the following objectives:
Methods of Job Evaluation
Methods of job evaluation are as follows:
Merit Rating
Job evaluation is the rating of the job in order to bring rationality in the wage and salary structure in the organisation. On the other hand, merit rating is the comparative evaluation and analysis of individual merits of the employees. The merit rating aims at evaluation and ranking the individual employees in order to plan and implement rational promotional policies in the organisation. Merit rating has the following objectives:
Thus, it can be understood that merit rating is extremely useful for organisations for evaluating the employees.
However, the main limitations are that the rating can be subjective which will give rise to the disputes and there is a possibility that past performance of an employee may be given too much importance.
Difference between Merit Rating and Job Evaluation
The difference between the merit rating and job evaluation are as follows:
Time and Motion Study
The study of time and motion is essential for designing an incentive system. Time study determines the time to be spent on the job. Standard time is the time that should be taken for completing a particular job under standard or normal working conditions. For fixation of standard time, motion study is necessary. Thus, the motion study precedes the time study. Motion study means dividing the job into fundamental elements or basic operations of the job or process and studying them in detail to eliminate the unnecessary elements or motions. After investigation all movements in a job, process or operation, the motion study aims at finding out the most scientific and systematic way of performing the job. After eliminating unnecessary motions, the time that should be taken to perform these motions is decided with the help of a stop watch. In the time so fixed, some allowance is added in the same for normal idle time, which is due to fatigue, change of job, change of tools, and preventive maintenance of machines and so on. Thus, standard time for a job or process is arrived at. The time and motion study aims at:
The following are the benefits of Time and Motion Study:
Payroll Department
Roll of payroll department is of crucial importance in overall labour cost computation and control. The main responsibilities of this department are preparation of payroll from clock cards, job or time tickets, or time sheet. The payroll shows the amount of wages payable to each worker showing the gross wages payable, the deductions and the net wages payable. For doing this calculation, they have to work in collaboration with time office, personnel department, cost accounting department and with the concerned department in which the worker is working. The functions of this department are given below:
Activitis and their respective Responsibilities
Following activities and the responsibility to discharge such activities are mentioned here under:
| Activities | Responsibilities | ||||
| i | Attendance and time details. | i | Time-keeping department. | ||
| ii | Preparation of list of employees and other details. | ii | Personnel / HR department | ||
| iii | Computation of wages and other incentives. | iii | Payroll department. | ||
| iv | Payment to employees. | iv | Payroll Department | ||
| v | Discharge of statutory liabilities | v | Cost Accounting Department | ||
Remuneration is the reward for labour under normal circumstances and is generally based on either time spent or on the result produced. The former is called “time-related” remuneration and the latter is known as “Piece-related” remuneration. The fixation of method of remuneration in a proper manner is vitally important for any organisation because it deals with the most sensitive item of the input, i.e., Labour.
The general principles which should be considered is designing a proper method of labour remuneration is summarised below:
Methods of Wage Payment
One of the important components of labour cost control is the wages system. A system of wage payment, which takes care of both, i.e., providing guarantee of minimum wages as well as offering incentive to efficient workers helps to motivate the workers to a great extent. It should also be remembered that high wages do not necessarily mean high labour cost because it may be observed that due to high wages the productivity of workers is also high and hence the per unit cost of production is actually decreased. On the other hand, if low wages are paid, it may result in lower productivity and hence higher wages do not necessarily mean high cost.
The following are the various methods of payment of wages:
These methods are discussed in the following paragraphs:
A. Time Rate Method
B. Piece Rate Method
This method is also called as payment by results where the workers are paid as per the production achieved by them. Thus, if a worker produces higher output, he can earn higher wages.
Under the piece rate system of wage payment, the workers receive a flat rate of wages either for time worked or for units manufactured.
Advantages
Disadvantages
I. Straight Piece Rate
In this method, rate per unit is fixed and the worker is paid according to this rate. For example, if the rate per unit is fixed at ₹ 10, and the output produced is 300 units, the remuneration to the worker will be ₹ 10 × 300 units = ₹ 3,000. This method thus offers a very strong incentive to the workers and is particularly suitable where the work is repetitive. The benefits of this method are as follows:
However, the main limitation of this method is that if a worker is not able to work efficiently due to reasons beyond his control, he will be penalized in the form of lower wages.
II. Differential Piece Rate
Under these methods, the rate per standard hour of production is increased as the output level rises. The increase in rates may be proportionate to the increase in output or proportionately more or less than that as may be decided. In other words, a worker is paid higher wages for higher productivity as an incentive. The rate per unit will be higher in this case as compared to the rate paid to a worker with lower productivity. For deciding the efficiency, comparison is made between the standard production and actual production of the worker. If the actual production is more, the worker qualifies for higher rate of wages. The differential piece rate methods will be useful when the production is of repetitive type, methods of production are standardized and the output can be identified with individual workers. The following are the major systems of differential piece rate system:
1. Taylor’s Differential Piece Rate System
Taylor is regarded as father of scientific management and he has recommended a system of Differential Piece Rate. According to him, there are only two classes of workers, efficient and inefficient. He suggested that while efficient workers should be encouraged to the maximum possible extent, the inefficient workers should be penalized. In order to do this, he has suggested two rates for the two classes of workers. Thus, according to Taylor, if the workers are efficient, they should be paid @ 120% of the normal piece rate and if they are inefficient, they should be paid @ 80% of the normal piece rate. For measuring efficiency, each worker will be given a standard production quantity to be produced in the time allowed and the actual production should be compared with the same. If a worker exceeds the standard, he will be regarded as efficient while if he fails to do so, he will be regarded as inefficient. The Merits and Limitations of the system are as follows:
Merits:
i. There is a very strong incentive to the workers, which helps to achieve higher productivity.
ii. Due to the incentive, best workers are attracted to the company.
iii. This method is quite simple and hence easy to understand.
Limitations:
i. Slow workers and beginners are penalized severely. Similarly, workers get penalized for reasons beyond their control, e.g., medical reasons, accidents etc. Therefore, it is said that there is no human element in this system.
ii. In an anxiety to produce more, quality may be neglected in order to achieve higher quantity of production.
Illustration 21
From the following particulars, calculate the earnings of workers X and Y and also comment on the labour cost.
Standard time allowed: 20 units per hour
Normal time rate: ₹30 per hour
Differential Rate to be applied:
80% of piece rate when below standard
120% of piece rate at or above standard
In a particular day of 8 hours, X produces 140 units while Y produces 165 units.
Solution:
Standard production per day is 20 units × 8 hours = 160 units
Worker ‘X’ produces 140 units which means he is below standard and will get wages @ 80% of the normal piece rate.
X’s earnings:
Normal piece rate = ₹30 per hour/20 units = ₹1.5 per unit
80% of the normal piece rate = ₹1.20 per unit
Earnings = ₹1.20 × 140 units = ₹168
Labour cost per unit = ₹168/140 units = ₹1.20
Y’s Earnings:
Y has produced more than the standard production of 160 units and hence he will get wages @ 120% of normal piece rate. His earnings will be as shown below.
Normal piece rate = ₹30 per hour/20 units = ₹1.50 per unit
120% of normal piece rate = ₹1.80 per unit
Earnings = ₹1.80 ×165 units = ₹297
Labour cost per unit = ₹2.97/165 units = ₹1.80
Comment: Labour cost increases from ₹1.20 per unit to ₹1.80 per unit. Taylor’s system is resisted on this ground as well as on the ground that it is very harsh on the workers.
2. Merrick Differential Piece Rate System
Merrick’s system is modification of Taylor’s system and is comparatively less harsh on the workers.
The scale of remunerations is as follows:
Production - Rates of Payment
Upto 83% of production - Normal piece rate
83% to 100% of production - 110% of ordinary piece rate
Above 100% of production - 120% of ordinary piece rate
3. Gantt Task Bonus Plan
In this method, there is a combination of time rate, bonus and piece rate plan. The remuneration is computed as shown below:
Production below standard - Guaranteed time rate
Production at standard - Bonus of 20% (normally) of time rate
Production above standard - High piece rate for the entire output
This method assures minimum wages for even too less efficient workers and hence is a preferred method of payment of wages. It also offers reasonably good incentive to efficient workers. However, the main limitation is that the method is complicated to understand by the workers and hence may create confusion amongst them.
Illustration 22
Amar, Akbar and Anthony are three workers working in a manufacturing company and their output during a particular 40 hours week was 96, 111 and 126 units respectively. The guaranteed rate per hour is ₹10 per hour, low piece rate is ₹4 per unit, and high piece rate is ₹6 per unit. High task is 100 units per week. Compute the total earnings and labour cost per unit under Taylor, Merrick and Gantt Task Bonus Plan.
Solution:
(a) Taylor Plan:
High task is 100 units
Worker Amar= Actual output is 96 units, which is less than the standard. This means he is inefficient and will get 80% of the normal piece rate i.e. @ ₹ 4.80 per unit. His wages will be = ₹ 4.80 ×96 units = ₹ 460.80.
Worker Akbar = Actual output is 111 units which is more than the standard. This means he is efficient and will get 120% of the normal piece rate i.e. ₹ 7.20 per unit. His wages will be = ₹ 7.20 × 111 units = ₹ 799.20
Worker Anthony = Actual output is 126 units, more than the standard. This means his wages will be = ₹ 7.20 ×126 units = ₹ 907.20.
(b) Merrick Plan:
Worker Amar= High task is 100 units, actual output is 96, this means that the efficiency level is 96%. As per Merrick Plan, wages of Amar will be 110% of normal piece rate which is ₹ 6.60 per unit = ₹ 6.60 × 96 units = ₹ 633.6
Worker Akbar = High task is 100 units, actual output is 111 units, efficiency level is 111%. Akbar will be entitled for wages @ 120% of normal piece rate i.e. @ ₹ 7.20 per unit. His wages will be, ₹ 7.20 × 111 units = ₹ 799.2
Worker Anthony = High task is 100 units, actual output is 126 units, efficiency level is 126%. Anthony will get at higher piece rate @ ₹ 7.20 per unit. His wages will be ₹ 7.20 × 126 units = ₹ 907.2
(c) Gantt Task and Bonus Plan:
Worker Amar= ₹ 10 × 40 hours = ₹ 400 [Amar will get guaranteed time rate as his output is below the high task]
Worker Akbar = ₹ 6 × 111 units = ₹ 666 [High piece rate as output is above standard]
Worker Anthony = ₹ 6 × ₹126 units = ₹ 756 [High piece rate as output is above standard]
III. Piece Rate with Guaranteed Day Rates
1. Emerson’s Efficiency System
Under this system minimum time wages are guaranteed. Bonus in addition to minimum day wages is given to the worker beyond a certain efficiency level. A worker who is able to attain efficiency measured by his output which is equal 2/3 rd to of this standard efficiency or above, is deemed to be an efficient worker who deserves encouragement.
The scheme provides for payment of bonus at various levels of efficiency ranging from 66.67% to 150% in the following manner:
i. for a performance below 66.67% efficiency, only time rate wages is paid without any bonus.
ii. for a performance between 66.67% and 100% efficiency, bonus varies between 0.01% and 20%.
iii. above 100% efficiency level, bonus of 20% of basic wages + 1% for each 1% increase in efficiency is admissible.
Emerson’s efficiency system is superior to other differential piece rate as it encourages the slow worker to do better than before. It does not pre – suppose a high degree of average performance.
The wages are guaranteed on time basis.
2. Points Scheme – Bedaux System
Under this system the quantum of work that can be performed by a worker is expressed in Bedaux Points or B’s. These points represent the standard time expressed in terms of minutes that are necessary to perform a job. The standard numbers of points in terms of minutes are determined after analysing each operation or job in detail. Each such minute consists of the time required to complete a fraction of the operation or the job and also an allowance for rest due to fatigue. The workers who are not able to complete the tasks allotted to them within the standard time are paid only the normal daily rate of wages. Those workers who are able to increase their efficiency rate which is equal to the wages for time saved as indicated by excess of B’s earned (i.e., standard time for work done – over actual time) are paid 75% of the time saved.
C. Bonus Systems
I. Individual Bonus Plan
We have seen earlier that in the time rate system, the workers are paid according to the time taken while in case of piece rate system, the output produced by the worker decides his wages as rate per unit is fixed rather than rate per hour. In the premium bonus plan, the gain arising out of increased productivity is shared by both, the employer and employee.
The bonus to be paid to the workers is computed on the basis of savings in the hours, i.e., the difference between the time allowed and time taken. The time allowed is the standard time, which is fixed by conducting a time and motion study by the work study engineers. While fixing the standard time, due allowance is given for physical and mental fatigue as well as for normal idle time. The actual time taken is compared with this standard time and bonus is payable to the worker if the time taken is less than the standard time.
Time Allowed (TA), Time Taken (T)
Time Saved (TS = TA – T), Rate per hour (R)
The individual bonus schemes commonly used are as follows:
b. Group Bonus Plan
The plans described above are all individual bonus plans. Many times, output of individuals cannot be measured. Similarly, the output of individual is dependent on the performance of the group. In such cases, rather implementing individual bonus systems, group bonus system is implemented. The total amount of bonus, which is determined according to productivity, can then be shared equally or in agreed proportion between the group members. The main objects of group bonus system are as follows:
Different Group Bonus Schemes in use are as follows:
C. Bonus System for Indirect Workers
Indirect workers do not take part in the production process directly but they play important role in the production process. It is difficult to chalk out a bonus system for indirect workers, as there is a difficulty in measuring their output. However, it is advisable to plan a bonus system for indirect workers in order to motivate them for better productivity. Bonus to indirect workers is paid on the basis of output of the department, saving in time or expenditure against the budgeted, product quality, reduction of waste and scrap and reduction of labour turnover.
D. Indirect Monetary Incentives
These methods aim at giving additional remuneration based on the prosperity of the concern. The following schemes fall in this category:
Treatment of some of the Employees Cost items in Costing
Illustration 23
Time allowed for a job is 48 hours; a worker takes 40 hours to complete the job. Time rate per hour is ₹ 15. Compute the total earnings of the worker under the following Bonus schemes:
Solution:
Time Allowed (TA) = 48 hours, Time Taken (T) = 40 hours,
Time Saved (TS = TA – T) = 8 hours, Rate per hour (R) = ₹ 15
a. Halsey Plan
Earnings = T × R + 50 / 100 × TS × R
= 40 × 15 + 50 / 100 × 8 × 15
= 600 + 60 = ₹ 660
b. Halsey – Weir Plan
Earnings = T × R + 33 1/3 % × TS × R
= 40 × 15 + 1/3 × 8 × 15
= 600 + 40 = ₹ 640
c. Rowan Plan
Earnings = T × R + TS /TA × T × R
= 40 × 15 + 8/48 × 40 × 15
= 600 + 100 = ₹ 700
d. Barth Variable Sharing Plan
Earnings = R × √(TA × T)
= 15 × √(48 × 40)
= 15 × 43.82 = ₹657.30
Illstration 24
During October 2021, the following information is obtained from the Personnel Department of a manufacturing company. Labour force at the beginning of the month 1,900 and at the end of the month 2,100. During the month 25 people left while 40 persons were discharged. 280 workers were engaged out of which only 30 were appointed in the vacancy created by the number of workers separated and the rest on account of expansion scheme. Calculate the Labour Turnover by different methods.
Solution:
Computation of Labour Turnover
Additions Method:
Number of Additions/Number of average workers during the period = 280 / 2000 X 100 = 14%
Separation Method:
Number of Separations/Number of average workers during the period = (25+40)/2000 × 100 = 3.25%
Replacement Method:
Number of Replacements / Number of average workers during the period = 30/2000 X 100 = 1.5%
Flux Method:
½ [Number of Additions + Number of Separations] / Number of average workers during the period = [½(280 + 65) / 2000]×100 = 173/2000 X 100 = 8.63%
Note: Average number of workers in all the above methods is computed by taking Opening number of workers + Closing number of workers / 2 = 1900 + 2100/2 =2000
Illustration 25
The management of XYZ Ltd is worried about the increasing Labour Turnover in the factory and before analysing the uses and taking remedial steps; they want to have an idea of the profit foregone as a result of Labour Turnover during the last year. Last year’s sales amounted to ₹83,03,300 and the profit / volume ratio was 20%. The total number of actual hours worked by the direct labour force was 4.45 lakhs. As a result of the delays by the personnel department in filling vacancies due to Labour Turnover, 1,00,000 potentially productive hours were lost. The actual direct labour hours included 30,000 hours attributable to training new recruits, out of which, half of the hours were unproductive. The cost incurred consequent on labour turnover revealed, on analysis the following: Settlement cost due to leaving: ₹43,820, recruitment costs: ₹26,740, selection costs: ₹12,750 and training costs: ₹30,490.
Assuming that the potential production lost as a consequence of Labour Turnover could have been sold at prevailing prices, compute the profit foregone last year on account of Labour Turnover.
Solution:
Profit foregone = Loss in Contribution + Additional Cost incurred as a result of labour turnover
Actual Productive Hours during last year
= 4,45,000 – 15,000 [i.e. 50% × 30,000 hours]
= 4,30,000 hours
Sales during last year = ₹83,03,300
Productive Hours Lost in Current Year = 1,00,000 Hrs.
∴ Loss in Sales during the current year = ₹83,03,300×1,00,000 Hrs.
= 4,30,000 hours
and Loss in Contribution = 20% × ₹19,31,000 = ₹3,86,200
Computation of Profit Foregone during the current year
| Amount (₹) | |
| Contribution Lost | 3,86,200 |
| Settlement Cost due to leaving | 43,820 |
| Recruitment Cost | 26,740 |
| Selection Cost | 12,750 |
| Training Cost | 30,490 |
| Profit Foregone | 5,00,000 |
Illustration 26
Calculate the total earnings and effective rate of earnings per hour of three operators: A, B and C under Rowan System and Halsey System from the following particulars:
The standard time fixed for producing 1 dozen articles is 50 hours. The rate of wages is ₹ 1 per hour. The actual time taken by three are as follows:
A 45 hours
B 40 hours
C 30 hours
Solution:
| Particulars | A | B | C | ||
| Time Allowed (TA) | 50 hours | i | Time-keeping department. | ||
| Time Taken (T) | 45 hours | ||||
| Time Saved (TS) | 5 hours | ||||
| Rate per hour (R) | ₹ 1 | ₹ 1 | ₹ 1 | ||
| Earnings under Rowan Plan = T × R + TS/TA × T × R | |||||
| Earnings |
= 45 × 1 + 5/50 × 45 × 1 = 45 + 4.50 = ₹ 49.50 |
= 40 × 1 + 10/50 × 40 × 1 = 40 + 8 = ₹ 48 |
= 30 × 1 + 20/50 × 30 × 1 = 30 + 12 = ₹ 42 |
||
| Effective Rate (i.e., Earnings per hour) | ₹ 49.50/45 hours = ₹ 1.10 | ₹ 48/40 hours = ₹ 1.20 | ₹ 42/30 hours = ₹ 1.40 | ||
| Earnings under Halsey Plan = T × R + 50/100 × TS × R | |||||
| Earnings |
= 45 × 1 + 50/100 × 5 × 1 = 45 + 2.50 = ₹ 47.50 |
= 40 × 1 + 50/100 × 10 × 1 = 40 + 5 = ₹ 45 |
= 30 × 1 + 50/100 × 20 × 1 = 30 + 10 = ₹ 40 |
||
| Effective Rate(i.e., Earnings per hour) | ₹ 47.50/45 hours = ₹ 1.06 | ₹ 45/40 hours = ₹ 1.125 | ₹ 40/30 hours = ₹ 1.33 | ||
Illustration 27
Suresh takes 9 hours to complete a job on daily wages and 6 hours on a scheme of payment by results. His hourly rate is 25 paise. The Material cost of the product is ₹4 and factory overheads are recovered at 150% of the total direct wages. Calculate the factory cost of the product under following methods:-
(a) Time rate system (b) Halsey Plan (c) Rowan Plan.
Solution:
Computation of factory cost under three systems:
| Time Rate System | Halsey Plan | Rowan Plan | |
| Material | 4.00 | 4.00 | 4.00 |
| Labour (working notes) | 2.25 | 1.88 | 2.00 |
| Overheads (150% of total direct wages) | 3.38 | 2.82 | 3.00 |
| Factory Cost | 9.63 | 8.70 | 9.00 |
Working Notes:
1. Computation of Earnings (i.e., Labour Cost) under three systems
| Time Rate System | Halsey Plan | Rowan Plan | |
| Labour | 9 x 0.25 | 6 x 0.25 + 1/2 (9-6) x 0.25 | 6 x 0.25 + (9-6 / 9) x 6 x 0.25 |
| 2.25 | 1.88 | 2.00 |
Illustration 28
Ramesh under the Halsey method of remuneration has a day rate of ₹ 12 per week of 48 hours, plus a cost of living bonus of 10 paise per hour worked. He is given 8 hours task to perform, which he performs in 6 hours, he is allowed 30% of the time saved as premium bonus. What would be his earnings under Halsey Plan and Rowan Plan.
Solution:
| Earnings under Halsey Plan | = T × R + 30% × TS × R |
| = 6 × 0.25 + 2/8 × 6 × 0.25 = 1.50 + 0.375 = ₹ 1.65 | |
| Add: Cost of Living Bonus (6 hours × 10 paise per hour) | = ₹ 0.60 |
| Gross Earnings under Rowan Plan | = ₹ 2.25 |
| Earnings under Rowan Plan | = T × R + TS/TA × T × R |
| = 6 × 0.25 + 2/8 × 6 × 0.25 = 1.50 + 0.375 ≈ ₹ 1.88 | |
| Add: Cost of Living Bonus (6 hours × 10 paise per hour) | = ₹ 0.60 |
| Gross Earnings under Rowan Plan | = ₹ 2.48 |
Illustration 29
In a factory guaranteed wages at the rate of ₹ 1.80 per hour are paid in a 48 hour week. By time and motion study it is estimated that to manufacture one unit of a particular product 20 minutes are taken, the time allowed is increased by 25% . During the week A produced 180 units of the product. Calculate his wages under the following methods:
(a) Time Rate
(b) Piece Rate with a guaranteed weekly wage
(c) Halsey premium Bonus
(d) Rowan Premium Bonus
Solution:
(a) Calculation of wages under Time Rate System
Earnings under time wages = TR
= 48 × 1.8 = ₹ 86.4
(b) Calculation of wages under Piece Rate with a Guaranteed Wage Rate
Normal Time for one unit = 20 minutes
(+) Relaxation allowance @ 25% = 5 minutes
Standard Time = 25 minutes
No. of pieces per hour = 60/25 pieces.
Piece Rate = Hourly Rate / No. of pieces per hour
= 1.8 ÷ (60/25)
= 0.75
Earnings under Piece Rate = 180 x 0.75 = ₹ 135
(c) Calculation of wages under Halsey Premium Bonus
Standard time for actual production = 180 x 25 / 60 = 75 hours
Earnings under Halsey Plan = (48 x 1.8) + 50/100 (75-48) x 1.8
= 86.4 + 24.3 = ₹ 110.70
(d) Calculation of wages under Rowan Premium Bonus
Standard time for actual production = 180 x 25 / 60 = 75 hours
Earnings under Rowan Plan = (48 x 1.8) + (75-48 / 75) x (48 x 1.8)
= 86.4 + 31.104 ≈ ₹ 117.50
Illustration 30
Calculate the earnings of workers A and B under Straight Piece Rate system and Taylor’s DifferentialPiece Rate system from the following particulars:-
Normal rate per hour - ₹1.80
Standard time per unit 20 seconds
Differentials to be applies are:
80% of the piece rate below the standard;
120% of the piece rate at or above standard.
A produced 1,300 units per day of 8 hours & B -1,500 units per day of 8 hours.
Solution:
Pieces per minute = 60/20 = 3 units
Units per hour = 60 x 3 = 180 units
Normal piece rate = 1.8 /180 = ₹ 0.01
Standard production in actual time = 8 x 180 = 1440 units
Earnings under Straight Piece Rate:
Earnings of A = 1300 x 0.01 = ₹ 13.00
Earnings of B = 1500 x 0.01 = ₹ 15.00
Earnings under Taylor’s Differential Piece Rate:
A’s efficiency = 1300 / 1440 x 100 = 90.28%
= < 100%
A’s Earnings = 1300 x 0.01 x 80%
= ₹ 10.42
B’s efficiency = 1500 / 1440 x 100 = 104.17%
= > 100 %
B’s Earnings = 1500 x 0.01 x 120%
= ₹ 18
Illustration 31
The following particulars apply to a particular job:
Standard production per hour - 6 units
Normal rate per hour - ₹ 1.20
Mohan produced 32 units
Ram produces 42 units
Prasad produces 50 unit
Calculate the wages of these workers under Merrick Differential Piece Rate System.
Solution:
Calculation of wages of workers under Merrick Differential Piece Rate System
Normal Piece rate = 1.2 / 6 = 0.20
Standard Production = 6 x 8 (assumed hrs) = 48 units
Mohan’s efficiency = 32/48 x 100 = 66.67% (< 83%)
Mohan’s Earnings = 32 x 0.2 = ₹ 6.4
Ram’s efficiency = 42/48 x 100 = 87.5% (> 83 but < 100%)
Ram’s Earnings = 42 x 0.2 x 110/100 = ₹ 9.24
Prasad’s efficiency = 50/48 x 100 = 104.17 (> 100%)
Prasad’s Earnings = 50 x 0.20 x 120/100 = ₹ 12
*Normal Piece Rate = Normal Rate per hour/Standard Production per hour = ₹ 1.20/6 units = ₹ 0.20
#Efficiency = Actual Production/Standard Production × 100
Illustration 32
In a manufacturing concern the daily wage rate is ₹2.50. The standard output in a 6 day week is 200 units representing 100% efficiency. The daily wage rate is paid without bonus to those workers who show up to 66 2/3% of the efficiency standard. Beyond this there is a bonus payable on a graded scale as below:-
82% efficiency - 5% bonus
90% Efficiency - 9% bonus
100% efficiency - 20% bonus
Further increase of 1% for every 1% further rise in efficiency. In a 6 day week A produced 180 units; B 164 units; C 200 units; D 208 units and E 130 units.
Calculate the earnings of these workers.
Solution:
A’s efficiency = (180 / 200) x 100 = 90%
A’s Earnings = (6 x 2.5) + 9% of (6 x 2.5) = ₹ 16.35
B’s efficiency = (164 / 200) x 100 = 82%
B’s Earnings = (6 x 2.5) + 5% of (6 x 2.5) = ₹ 15.75
C’s efficiency = (200 / 200) x 100 = 100%
C’s Earnings = (6 x 2.5) + 20% of (6 x 2.5) = ₹ 18.00
D’s efficiency = (208 / 200) x 100 = 104%
D’s Earnings = (6 x 2.5) + 24% of (6 x 2.5) = ₹ 18.60
E’s efficiency = (130 / 200) ×100 = 65%
E’s Earnings = 6 x 2.5 = ₹ 15.00
Illustration 33
Workmen of a particular grade working on 8 hour shift duty are guarantees a wage of ₹ 32. An incentive scheme is in operation according to which production bonus is earned directly proportional to performance but only after 100% performance is reached. Four workmen A,B,C and D produce 48, 60, 75 and 90 units respectively in 6 hours working on a job which has standard time of 6 minutes per unit as measured work content. Remaining 2 hours of the shift are spent in doing unmeasured work for which no incentive bonus can be paid. Find for each workman:
(a) The production performance level achieved;
(b) Total earnings for the day.
Solution:
Standard working hours per day 6 hours or 360 minutes
Standard Time required per unit 6 minute p.u.
∴ Standard Production / output per day = 360 minutes/6 minutes p.u. = 60 units
Hourly wages rate =₹ 32/8 hours = ₹ 4 per hour
Statement showing computation of performance achieved and total earnings of 4 workers:
| Particulars | A | B | C | D | |
| I | Standard output (6 x 60 / 6) | 60 | 60 | 60 | 60 |
| II | Actual output | 48 | 60 | 75 | 90 |
| III | Performance level | 48/60 × 100 = 80% | 60/60 × 100 = 100% | 75/60 × 100 = 125% | 90/60 × 100 = 150% |
| IV | Wages for measured work | 6 hours @ ₹ 4 = 24 | 6 hours @ ₹ 4 = 24 | 6 hours @ ₹ 4 = 24 | 6 hours @ ₹ 4 = 24 |
| V | Bonus [C = 24 x 25%] [D = 24 x 50%] | -- | -- | 6 | 12 |
| VI | Wages for unmeasured work (2 x 4) | 2 hours @ ₹ 4 = 8 | 2 hours @ ₹ 4 = 8 | 2 hours @ ₹ 4 = 8 | 2 hours @ ₹ 4 = 8 |
| VII | Total earnings (IV + V + VI) | 32 | 32 | 38 | 44 |
Illustration 34
The following particulars for the first week of September, 2015 relate to X and Y two workers employed in a factory:
| X | Y | ||
| a.) | Job Completed — units | 3,600 | 4,200 |
| b.) | Out of above output rejected and unsalable | 540 | 420 |
| c.) | Time allowed | 12 Mts/dozen | 3 Hrs./200 units |
| d.) | Basic wage rate per hour | ₹ 5 | ₹ 6 |
| e.) | Hours worked | 45 | 50 |
The normal working hours per week are fixed at 42 hours. Bonus is paid @ 2/3 of the basic wage rate for gross time worked and gross output produced without deduction for rejected output. The rate of overtime for first 4 hours is paid at time plus 1/3 and for next 4 hours is paid at time plus 1/2.
From the above data calculate for each employed
a) Number of bonus hours and amount of bonus earned;
b) Total wages earned including basic wages overtime premium and bonus;
c) Direct wages cost per 100 saleable units.
Solution:
| Particulars | X | Y | |
| 1. | No. of units completed | 3,600 | 4,200 |
| 2. | Rejected units | 540 | 420 |
| 3. | Saleable units | 3,060 | 3,780 |
| 4. | Standard time | 60 hrs | 63 hrs |
| 5. | Actual time worked | 45 hrs | 50 hrs |
| 6. | Bonus hours | 15 hrs | 13 hrs |
| 7. | Amount of bonus | 50 (15 x 5 x 2/3) | 52 (13 x 6 x 2/3) |
| 8. | Overtime wages | 20 (3 x 5 x 4/3) | 68 [(4 x 6 x 4/3) + (4 x 6x 3/2)] |
| 9. | Basic wages | 210 (42 x 5) | 252 (42 x 6) |
| 10. | Total wages (7 + 8 + 9) | 280 | 372 |
| 11. | Direct wage cost of 100 saleable units. | 9.15 (280 / 3060) x 100 | 9.84 (372 / 3780) x 100 |
Illustration 35
From the following particulars work out the earnings for the week of a worker under
(a) Straight Piece Rate
(b) Differential Piece Rate
(c) Halsey Premium System
(d) Rowan System
Number of working hours per week — 48
Wages per hour — ₹ 3.75
Normal time per piece — 20 Min
Normal output per week — 120 pieces
Actual output for the week — 150 pieces
Differential piece rate — 80% of the piece rate when output is below standard and 120% above standard.
Solution:
Computation of earnings for the week of a worker
(a) Piece rate = (48 x 3.75) / 120 = ₹ 1.5
Earnings under Straight Piece Rate = 150 x 1.5 = ₹ 225
(b) Efficiency = (150 / 120) x 100 = 125% (> 100%)
Earnings under Differential Piece Rate = 150 x 1.5 x 120/100= ₹ 270
(c) Standard time for actual production = 48 x (150 / 120) = 60 hrs
Earnings under Halsey Plan = (48 x 3.75) + 50/100(60 – 48) x 3.75 = 180 + 22.5 = ₹ 202.5
(d) Earnings under Rowan Plan = (48 x 3.75) + [(60-48 / 60) x (3.75 x 48)] = 180 + 36 = ₹ 216
Illustration 36
Ten men work as a group. When the weekly production of the group exceeds standard (200 pieces per hour) each man in the group is paid a bonus for the excess production in addition to his wages at hourly rates. The bonus is computed thus:
The percentage of production in excess of the standard amount is found and one-half of this percentage is considered as the men’s share. Each man in the group is paid as bonus this percentage of a wage rate of ₹ 3.20 per hour. There is no relationship between the individual workman’s hourly rate and the bonus rate. The following is the week’s records.
| Hours worked | Production | |
| Monday | 90 | 22,100 |
| Tuesday | 88 | 22,600 |
| Wedenesday | 90 | 24,200 |
| Thursday | 84 | 20,100 |
| Friday | 88 | 20,400 |
| Saturday | 40 | 10,200 |
| 480 | 1,19,600 |
(a) Compute the rate and amount of bonus for the week;
(b) Compute the total pay of Jones who worked 41 ½ hours and was paid ₹2 per hour basic and of Smith who worked 44 ½ hours and was paid ₹ 2.50 per hour basic.
Solution:
Standard production in actual time = 480 x 200 = 96,000
Excess of actual production over standard = 1,19,600 – 96,000 = 23,600.
% of excess over standard = (23,600 / 96,000) x 100 = 24.58%
% of bonus = 1/2 x 24.58 = 12.29%
Bonus rate per hour = 3.2 x 12.29% = 0.393
Total bonus for week = 480 x 0.393 = ₹ 188.64
Computation of Total Earnings of Jones & Smith:
| Particulars | Jones | Smith | ||
| Basic wages | 41.5 x 2 | 83.00 | 44.5 x 2.5 | 111.25 |
| Bonus | 41.5 x 0.393 | 16.31 | 44.5 x 0.393 | 17.49 |
| Total Earnings | 99.31 | 128.74 |
Illustration 37
A manufacturer introduces a new machinery into his factory with the result that production per worker is increased. The workers are paid by results and it is agreed for every 2% increases in average individual output, an increase of 1% on the rate of wages will be paid.
At the time the machinery is installed the selling price of the products falls by 8-1/3%. Show the net saving in production costs which would be required to offset the losses expected from the turnover and bonus paid to workers.
| Ist period | IInd period | |
| No.of workers | 175 | 125 |
| Number of articles produced | 16,800 | 14,000 |
| Wages paid | 33,600 | |
| Total Sales | 75,600 |
Solution:
No. of units per worker in period I — = 16,800 / 175 = 96
No. of units per worker in period II — = 14,000 / 125 = 112
Increase in production per worker — = 16 units
% of increase in output = 16/96 x 100 — = 16 2/3 %
Wages in Period I = 33,600
Wages in Period II = 33,600 x (125 / 175) = 24,000
Increase in wages = 24,000 x 8.33% [16.67 x ½ = 8.33] = 2,000
Sales in Period I = 75,600
Sales in Period II = 75,600 x (14,000 / 16,800) = 63,000
Decrease in Sales = 63,000 x 8 1/3 % = 5,250
Total loss due to increase in wages & reduction in sales = 5,250 + 2,000 = 7,250
To offset the loss, the saving in other must be ₹ 7,250
Illustration 38
A work measurement study was carried out in a firm for 10 hours and the following information was generated.
Units produced : 350
Idle time : 15%
Performance rating : 120%
Allowance time : 10% of standard time.
What is the standard time for task?
Solution:
Calculation of standard time for task
Total time = 10 x 60 = 600 minutes
(-) Down time or Idle time @ 15% = 90 minutes
Actual time = 510 minutes
Normal Time = 510 x 120% = 612 minutes
(+) Relaxation allowance
(10% or 1/10 on standard time i.e. 1/9 on normal time) = 68 minutes
Standard time for job = 680 minutes
Alternatively
Standard Time – Allowance Time = Normal Time
or, Standard Time – 10% of Standard Time = 612
or, 90% Standard Time = 612
or, Standard Time = 612/90% = 680 minutes
Illustration 39
The extracts from the payroll of M/s. Maheswari Bros. is as follows:-
Number of employees at the beginning of 2015 : 150
Number of employees at the end of 2015 : 200
Number of employees resigned : 20
Number of employees at the discharged : 5
Numbers replaced due to resignation and discharges : 20
Calculate the Labour Turnover Rate for the factory by different methods.
Solution:
1) Separation Method = 25 ÷ (150 + 200 / 2) x 100 = 0.1429 x 100 = 14.29 %
2) Replacement Method = (20 / 175) x 100 = 11.43%
3) Flux Method = (25 + 20) ÷ 175 x 100 = 25.71%
Illustration 40
In a factory, bonus to workman is paid according to Rowan Plan. Time allotted for a job is 40 hours and the normal rate of wages is ₹ 1.25 per hour. The factory overhead charges are 50 paise per hour for the hours taken.
The factory cost of a work order, executed by a worker is ₹ 161.875. The cost of material in each case is ₹100.
Calculate the hours of time taken by the workman to complete the work order.
Solution:
Let ‘T’ be the time taken by worker.
Earnings = 1.25 T + [(40-T) / 40] x [1.25 T]
= 1.25 T + [(50T – 1.25 T2) / 40]
= [50T + 50 T – 1.25T2] / 40
= [100 T – 1.25T2] / 40
Materials + Wages + Factory Overheads = Factory Cost
⇒ 100 + [100 T – 1.25T2] / 40 + 0.5 T = 161.875
⇒ 4000 + 100 T – 1.25T2 + 20T = 6475
⇒ 1.25T2 – 120 T + 2475 = 0
⇒ 5T2 – 480 T + 9900 = 0
⇒ T2 – 96T + 1980 = 0
T = 66 (or) 30
T = 30 hours (because actual time should not be more than standard time).
Illustration 41
Two fitters, a labourer and a boy undertake a job on piece rate basis for ₹1,290. The time spent by each of them is 220 ordinary working hours. The rates of pay on time rate basis, are ₹1.50 per hour for each of the two fitters, ₹1 per hour for the labourer and ₹0.50 per hour for the boy.
The amount of piece-work premium and the share of each worker, when the piece -work premium is divided proportionately to the wages paid.
Compute the selling price of the above job on the basis of the following additional data:-
Cost of the direct material ₹2,010; works overhead at 20% of prime cost; selling overhead at 10% of works cost and profit at 25% on cost of sales.
Solution:
Statement showing computation of earnings of each person
| Particulars | F1 | F2 | Labourer | Boy | Total |
| Basic wages | 330 (220x1.5) | 330 | 220 (220x1) | 110 (220x0.5) | 990 |
| Bonus | 100 | 100 | 67 | 33 | 300 |
| 430 | 430 | 287 | 143 | 1290 |
Computation of Selling Price of Job
| Particulars | Amount (₹) |
| Materials | 2,010 |
| Labour | 1,290 |
| Prime Cost | 3,300 |
| (+) Works Overhead @ 20% | 660 |
| Works cost | 3,960 |
| (+) S & D overheads @ 10% | 396 |
| Cost of sales (or) Total Cost | 4,356 |
| (+) Profit @ 25% | 1,089 |
| Selling Price | 5,445 |
Illustration 42
Two workmen, Jay and Viru, produce the same product using the same material. Their normal wage rate is also the same. Jay is paid bonus according to the Rowan System, while Viru is paid bonus according to Halsey System. The time allowed to make the product is 100 hours. Jay takes 60 hours while Viru takes 80 hours to complete the product. The factory overhead rate is ₹10 per man-hour actually worked. The factory cost for the product for Jay is ₹7,280 and for Viru it is ₹ 7,600.
You are required:-
(a) to find the normal rate of wages;
(b) to find the cost of materials;
(c) to prepare a statement comparing the factory cost of the products as made by the two works men.
Solution:
Let ‘R’ be the wage rate and ‘M’ be the material cost.
Earnings of Jay = 60 R + [(100-60) / 100] x [60R]
= 60R + 24R = 84R
Material + Wages + Factory Overheads = Factory Cost.
M + 84R + 600 = 7,280
⇒ M + 84 R = 6,680 → (1)
Earnings of Viru = 80 R + 50% of (100-80) x R
= 80 R + 10 R
= 90 R
Material + Wages + Factory Overheads = Factory Cost.
M + 90R + 800 = 7,600
⇒ M + 90 R = 6,800 → (2)
Solving Equation (1) & (2), we get
M + 84 R = 6,680
M + 90 R = 6,800
- 6R = -120
R = 20
Substitute the value of ‘R’ in Equation (2), we get
M + 90 R = 6,800
⇒ M + 90 (20) = 6,800
⇒ M + 1800 = 6,800
⇒ M = 5,000
Wages of Jay = (60 x 20) + [(100-60) / 100] x [60 x 20]
= 1200 + 480 = ₹ 1680
Wages of Viru = (80 x 20) + 50% (100 – 80) x 20
= 1600 + 200 = ₹ 1800
(a) Normal Rate of wages = ₹ 20
(b) Material Cost = ₹ 5,000
(c) Statement comparing the factory cost of the products as made by the two worksmen.
| Particulars | Jay | Viru |
| Material | 5,000 | 5,000 |
| Labour | 1,680 | 1,800 |
| Overheads | 600 | 800 |
| Factory Cost | 7,280 | 7,600 |
Working Note:
Computation of Wages
| Jay | Viru |
| Rowan Plan = T × R + TS/TA × T | Halsey Plan = T × R + 50/100 × TS × R |
| T = 60 hrs, | T = 80 hrs, |
| TA = 100 hrs, | |
| TS = 100 – 60 = 40 hrs | TS = 100 – 80 = 20 hrs |
Cost Accounting Standard – 7: Employee Cost (CAS 7)
Employee Cost: The aggregate of all kinds of consideration paid, payable and provisions made for future payments for the services rendered by employees of an enterprise (including temporary, part time and contract employees). Consideration includes wages, salary, contractual payments and benefits, as applicable or any payment made on behalf of employee. This is also known as labour cost.
Principles of Measurement of Employee Cost: The principles to be followed for measurement of employee costs are:
measurement of Employee Cost: Inclusions and Exclusions
The following items are to be ‘included’ for the purpose of measuring employee cost:
The following items are to be ‘excluded’ for the purpose of measuring employee cost:
Illustration 43
Measurement of Employee Cost
Basic pay ₹ 5,00,000; Lease rent paid for accommodation provided to an employee ₹ 2,00,000, Amount recovered from employee ₹ 40,000, Employer’s Contribution to P.F. ₹ 75,000, Employee’s Contribution to P.F. ₹ 75,000; Reimbursement of Medical expenses ₹ 67,000, Hospitalisation expenses of employee’s family member borne by the employer ₹ 19,000, Festival Bonus ₹ 20,000, Festival Advance ₹ 30,000. Compute the Employee Cost.
Solution:
| Particulars | Amount (₹) |
| Basic Pay | 5,00,000 |
| Add: Net cost to employer towards lease rent paid for accommodation provided to employee [2,00,000 – 40,000] | 1,60,000 |
| Add: Employer’s contribution to PF | 75,000 |
| Add: Reimbursement of Medical Expenses | 67,000 |
| Add: Hospitalisation expenses of employee’s family member paid by the employer | 19,000 |
| Add: Festival Bonus | 20,000 |
| Employee Cost | 8,41,000 |
Note:
1. Festival advance is a recoverable amount. Hence, not included in employee cost.
2. Employee’s contribution to PF is not a cost to the employer. Hence, not considered
Illustration 44
Measurement of Employee Cost (with special items)
Gross pay ₹10,30,000 (including cost of idle time hours paid to employee ₹25,000); Accommodation provided to employee free of cost [this accommodation is owned by employer, depreciation of accommodation ₹1,00,000, maintenance charges of the accommodation ₹90,000, municipal tax paid for this accommodation ₹3,000], Employer’s Contribution to P.F. ₹1,00,000 (including a penalty of ₹2,000 for violation of PF rules), Employee’s Contribution to P.F. ₹75,000. Compute the Employee cost.
Solution:
Computation of Employee Cost
| Particulars | Amount (₹) | |
| Gross Pay ( net of the cost of idle time) =[10,30,000 (-) 25,000] | 10,05,000 | |
Add |
Cost of accommodation provided by the employer | 1,93,000 |
| = Depreciation (+) Municipal Tax paid (+) maintenance charges = 1,00,000 + 90,000 + 3,000 = 1,93,000 | ||
| Add | Employer’s Contribution to PF excluding penalty paid to PF authorities [ =1,00,000 (-) 2,000] | 98,000 |
| Employee Cost | 12,96,000 |
Note:
(i) Assumed that the entire accommodation is exclusively used by the employee. Hence, cost of accommodation provided includes all related expenses/costs, since these are identifiable/traceable to the cost centre.
(ii) Cost of idle time hours is assumed as abnomal. Since it is already included in the gross pay, hence excluded.
(iii) Penalty paid to PF authorities is not a normal cost. Since, it is included in the amount of contribution, it is excluded.
Illustration 45
Measurement of Employee Cost (with special items)
Trial Balance as on 31.3.2017 (relevant extracts only)
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| Materials consumed | 25,00,000 | ||
| Salaries | 15,00,000 | Special Subsidy received from Government towards Employee salary | 2,75,000 |
| Employee Training Cost | 2,00,000 | Recoverable amount from Employee out of perquisites extended | 35,000 |
| Perquisites to Employees | 4,50,000 | ||
| Contribution to Gratuity Fund | 4,00,000 | ||
| Lease rent for accommodation provided to employees | 3,00,000 | ||
| Festival Bonus | 50,000 | ||
| Unamortised amount of Employee cost related to a discontinued operation | 90,000 |
Solution:
Computation of Employee Cost
| Particulars | Amount (₹) | |
| Salaries | 15,00,000 | |
Add |
Net Cost of Perquisites to Employees | 4,15,000 |
| = Cost of Perquisites (-) amount recoverable from employee | ||
| = 4,50,000 (-) 35,000 | ||
| Add | Lease rent paid for accommodation provided to employee | 3,00,000 |
| Add | Festival Bonus | 50,000 |
| Add | Contribution to Gratuity Fund | 4,00,000 |
| Less | Special subsidy received from Government towards employee salary | (2,75,000) |
| Employee Cost | 23,90,000 |
Note:
(i) Recoverable amount from employee is excluded from the cost of perquisites.
(ii) Employee training cost is not an employee cost. It is to be treated as an Overhead, hence, not included.
(iii) Special subsidy received is to be excluded, as it reduces the cost of the employer.
(iv) Unamortized amount of employee cost related to a discontinued operation is not an includible item of cost.
Overtime Wages / Overtime Premium
The Factories Act provides for payment of overtime wages at double usual rates of wages. Even where the Act is not applicable, the practice is to pay for overtime work at higher rates usually in accordance with a standing agreement between the employer and the workers. Hence, payment of overtime consists of two elements, viz., the normal (i.e., usual) amount and the extra payment, i.e., the premium. As per CAS – 7, the overtime and overtime premium is defined as “Overtime is the time spent beyond the normal working hours which is usually paid at a higher rate than the normal time rate. The extra amount payable beyond the normal wages and salaries for beyond the normal working hours is called Overtime Premium”.
Treatment of Overtime in Cost Records
As per CAS – 7, overtime premium shall be assigned directly to the cost object or treated as overheads depending on the economic feasibility and specific circumstances requiring such overtime. When overtime is worked due to exigencies or urgencies of the work, the basic / normal payment is treated as Direct Labour Cost and charged to production or cost unit on which the worker is employed. Whereas the amount of premium (extra amount) is treated as overhead.
If overtime is spent at the request of the customer, then the entire amount (including overtime premium) is treated as direct wages and should be charged to the job.
When the overtime is worked due to lack of capacity as general policy of the company, then the total amount paid is treated as direct wages which is computed at the estimated rate based on the figures of the previous years.
Overtime worked on account of the abnormal conditions such as flood, earthquake, etc., should not be charged to cost, but to costing profit and loss account if integrated accounts are maintained.
It will thus be seen that overtime involves payment of increased wages and should be resorted to only when extremely essential. The disadvantages attached to overtime working are as follows:
Idle Time
Idle time cost represents the wages paid for the time lost during which the worker does not work, i.e., time for which wages are paid, but no work is done. As per CAS – 7, idle time is defined as “the difference between the time for which the employees are paid / payable to employees and the employees time booked against the cost object”. This happens because due to various causes for which he is not responsible, the worker remains idle but full wages are paid to him. Even for workers who are paid on the basis of output, idle time payment may be required to be made.
The causes leading to idle time may be broadly classified into four categories, viz:
Treatment of Idle Time
As per CAS – 7, Idle Time cost shall be assigned direct to the cost object or treated as overheads depending on the economic feasibility and specific circumstances causing such idle time.
Treatment of different categories of idle time are as follows:
Idle Time Preventive Measures
Idle Time may be eliminated or reduced to a large extent by taking suitable preventive measures such as:
Employee cost reporting
Measuring Productivity
Productivity is simply the amount of units of a product or service that an employee handles in a defined time frame. An employee who makes mechanical device make 20 mechanical devices per hour, or an employee at a coffee shop might service 15 customers per hour. Simply productivity is neither good nor bad, and in service industries, it might vary according to factors beyond the employee’s control, like the number of customers who present for service. Productivity is the basic measure of employee work output.
Determining Unit of Service (UOS)
Productivity and efficiency require a defined unit of service. UOS analysis is usually job-specific, and is most relevant to employees who have jobs that are repetitive. For example, a spot welder might have “welds completed” or “parts completed” as his UOS, whereas a housekeeper in a hotel might have “rooms cleaned per shift” as her UOS. Some jobs, particularly professional jobs that have variable output, defy reasonable UOS measurements.
Measuring Efficiency
For many businesses, including most small businesses, the most significant cost is labour. Salaries and wages comprise the major line item expense for most retail and small scale manufacturing companies, but labour also tends to be responsive to productivity improvements. To reduce labour costs, entrepreneurs should consider measuring employee efficiency and setting aggressive performance targets to get most of their employee costs.
Efficiency is a ratio of an employee’s actual time to perform each UOS against the theoretical time needed to complete it. For example, an employee who packages DVDs might put together 80 DVDs in one hour. If the best practice target is 100 DVDs in an hour – measured by a time study – then the employee is 80 percent effective and has the capacity to package 20 more units per hour. It is usually helpful to report separately the percentage of an employee’s paid time that is actually spent performing direct work. For example, an employee who is paid for working 8 hours but because of meetings and lunch breaks, works for 6 hours only i.e., the employee’s 75 percent time being “productive” in terms of UOS analysis. Only the six hours working should be factored into efficiency scoring.
Benchmarks and Targets
Some industries have basic benchmarks already established. For example, telephone call centres have service levels that identify the ideal amount of time that common transactions should take, that are consistent across industries. However, most companies will have to establish for themselves, how long basic tasks should take, and set performance targets accordingly. The task of baseline measuring should be done with a time study, which averages the amount of time that multiple transactions take or assess the amount of time an average employee performs the task. It may not be ideal to require employees to be 100 percent efficient, particularly when the employees lack control over their own productivity – like in customer – service jobs when employees wait for customers to call or stop by. If an employee can never hit 100 percent, then morale may suffer.
Longitudinal Reporting
The real benefit to measuring employee is in longitudinal reporting. Calculating efficiency over a period of time can identify opportunities to reorganize staffing, or add or remove employees based on the company’s volume of business, and an individual employee’s long – term productivity can factor into merit increases and bonuses. Efficiency scoring can also help with predictive modelling. If it takes 90 seconds to produce a mechanical device, and employees are operating at 75 percent efficiency, then instead of producing 40 widgets per hour, only 30 will be produced.
Labour turnover is the rate of change in the labour force of a concern during a specific period. In every organisation some employees leave every year while new employees are recruited in their place. This is a natural phenomenon in industrial sector and it gives rise to the problem of labour turnover. The rate at which the employees depart from the organisation is normally measured as the ratio of number of persons leaving in a period to the average number of employees on the pay roll. A controlled level of labour turnover is considered as desirable because it helps the firm to adjust the size of its labour force in response to needs such as for seasonal changes or changes in technology.The rate of labour turnover is high if the number of employees leaving the organisation occurs frequently. This leads to (i) decrease in the productivity and efficiency in the concern, (ii) destabilize normal flow of work, (iii) increases the labour cost.
Causes of Labour Turnover
The causes giving rise to high labour turnover may be broadly classified under the following heads:
The above causes may also be classified in a different manner under three heads, viz., Financial Causes, Social and Economic Causes and Psychological Causes relating to human relationship.
Measurement of Labour Turnover
It is essential for any organisation to measure the Labour Turnover. This is necessary for having an idea about the turnover in the organisation and also to compare the labour turnover of the previous period with the current one.
The following methods are available for measurement of the labour turnover:
a. Additions Method: Under this method, number of employees added during a particular period is taken into consideration for computing the Labour Turnover. The method of computing is as follows:
Labour Turnover =Number of Additions/Average Number of Workers during the period × 100
b. Separation Method: In this method, instead of taking the number of employees added, number of employees left during the period is taken into consideration. The method of computation is as follows:
Labour Turnover =Number of separation/Average Number of Workers during the period × 100
c. Replacement Method: In this method neither the additions nor the separations are taken into consideration. The number of employees replaced is taken into consideration for computing the labour turnover.
Labour Turnover =Number of Replacement/Average Number of Workers during the period × 100
d. Flux Method: Under this method Labour Turnover is computed by taking into consideration the additions as well as separations. The turnover can also be computed by taking replacements and separations also. Computation is done as per the following methods:
Labour Turnover = (1/2 × (Number of Additions+Number of Separations)) / Average Number of Workers during the period × 100
Cost of Labour Turnover
Increasing Labour Turnover is a double edged sword. It reduces the productivity of labour and resulting in high costs. The cost of labour turnover may be analysed under two broad headings, Preventive Costs and Replacement Costs. Preventive Costs refer to all those items of expenditure which are incurred in order to keep the workers satisfied and thus to act as discouragement against leaving employment. Replacement Costs are those costs which are incurred for the recruitment and training of new hands and the resulting losses, wastages and lowering of productivity due to the inexperience and inefficiency of the new labour force.
Preventive Costs may be further grouped under the following heads:
Replacement Costs consist of the following:
Measures to reduce Labour Turnover
Labour turnover may be reduced by removing its avoidable causes and taking preventive remedial measures. The various measures may be summarised as follows:
Ruchika Saboo
An All India Ranker (AIR 7 - CA Finals, AIR 43 - CA Inter), she is one of those teachers who just loved studying as a student. Aims to bring the same drive in her students.
Ruchika Ma'am has been a meritorious student throughout her student life. She is one of those who did not study from exam point of view or out of fear but because of the fact that she JUST LOVED STUDYING. When she says - love what you study, it has a deeper meaning.
She believes - "When you study, you get wise, you obtain knowledge. A knowledge that helps you in real life, in solving problems, finding opportunities. Implement what you study". She has a huge affinity for the Law Subject in particular and always encourages student to - "STUDY FROM THE BARE ACT, MAKE YOUR OWN INTERPRETATIONS". A rare practice that you will find in her video lectures as well.
She specializes in theory subjects - Law and Auditing.
Yashvardhan Saboo
A Story teller, passionate for simplifying complexities, techie. Perfectionist by heart, he is the founder of - Konceptca.
Yash Sir (As students call him fondly) is not a teacher per se. He is a story teller who specializes in simplifying things, connecting the dots and building a story behind everything he teaches. A firm believer of Real Teaching, according to him - "Real Teaching is not teaching standard methods but giving the power to students to develop his own methods".
He cleared his CA Finals in May 2011 and has been into teaching since. He started teaching CA, CS, 11th, 12th, B.Com, M.Com students in an offline mode until 2016 when Konceptca was launched. One of the pioneers in Online Education, he believes in providing a learning experience which is NEAT, SMOOTH and AFFORDABLE.
He specializes in practical subjects – Accounting, Costing, Taxation, Financial Management. With over 12 years of teaching experience (Online as well as Offline), he SURELY KNOWS IT ALL.
"Koncept perfectly justifies what it sounds, i.e, your concepts are meant to be cleared if you are a Konceptian. My experience with Koncept was amazing. The most striking experience that I went through was the the way Yash sir and Ruchika ma'am taught us in the lectures, making it very interesting and lucid. Another great feature of Koncept is that you get mentor calls which I think drives you to stay motivated and be disciplined. And of course it goes without saying that Yash sir has always been like a friend to me, giving me genuine guidance whenever I was in need. So once again I want to thank Koncept Education for all their efforts."
"Hello everyone, I am Kaushik Prajapati. I recently passed my CA Foundation Dec 23 exam in first attempt, That's possible only of proper guidance given by Yash sir and Ruchika ma'am. Koncept App provide me a video lectures, Notes and best thing about it is question bank. It contains PYP, RTP, MTP with soloution that help me easily score better marks in my exam. I really appericiate to Koncept team and I thankful to Koncept team."
"Hi. My name is Arka Das. I have cleared my CMA Foundation Exam. I cleared my 12th Board Exam from Bengali Medium and I had a very big language problem. Koncept Education has helped me a lot to overcome my language barrier. Their live sessions are really helpful. They have cleared my basic concepts. I think its a phenomenal app."
"I cleared my foundation examination in very first attempt with good marks in practical subject as well as theoretical subject this can be possible only because of koncept Education and the guidance that Yash sir has provide me, Thank you."
